Variation in the DNA restriction map in the Adh region (alcohol dehydrogenase locus) of chromosome II of Drosophila melanogaster from natural populations was examined. Two and a half percent of the nucleotides are polymorphic in the 12 kilobase region examined. In addition, insertions and deletions are common. Insertions of over 200 nucleotides are transposable elements. The frequency distribution within Drosophila melanogaster and among related species suggests that such variants are deleterious mutants. Comparisons of Adh gene activity among inserted and noninserted sequences support this view for some variants. Selection for a limited element copy number appears to be the most likely general explanation for their deleterious behavior. Evidence is found for preferential insertion of transposable elements into sequences implicated as being important in gene regulation. The main element involved has been sequenced and shown to be a new member of the F-like family. Two levels of Adh activity (high and low) commonly segregating in natural populations appear due to one or more nucleotide substitutions within the transcript that in some way alter Adh expression (possibly by affecting mRNA stability, processing or translation). Examination of Adh region sequences in 59 lines of Drosophila that have collected mutations for 300 generations (59 x 300 x 2 = 35,400 allele generations) shows a significant increase in Adh activity variation but no structural gene or flanking sequence changes. Adh region variation has also been examined by restriction mapping and DNA sequencing in two related species, D. simulans and D. pneudrobscura. It is clear that the target for mutations of significant effect is substantially larger than the coding sequence for the gene product.